PulteGroup, Inc. (PHM) Q3 2026 Earnings Call Transcript

Operator: After today's prepared remarks, we will host a and answer session. If you would like to ask a question, star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to James Zeumer, vice president. Jim, please go ahead.

James Zeumer: Thank you, Erica, and good morning. I want to thank you for joining today's call. As we look forward to discussing PulteGroup's third quarter operating and financial results. On today's call, I am joined by Ryan R. Marshall, President and CEO; James L. Ossowski, Executive vice president and CFO and David Carrier, senior vice president finance. A copy of our earnings release and this morning's presentation have been posted to our corporate website at pultigroup.com. We will also post an audio replay of this call later today. I would highlight that today's presentation includes forward-looking statements about the company's expected future performance. Actual results could differ materially from those suggested by our comments today. The most significant risk factors that could affect future results are summarized as part of today's earnings release, and within the accompanying presentation slides. These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports. Let me turn the call over to Ryan.

Ryan R. Marshall: Thanks, Jim, and good morning. I am very proud of the business results our organization delivered thus far in 2026. In a world where we cannot control global events or macroeconomic conditions, we can manage how we respond to the operating environment. To that end, I think PulteGroup continues to do an excellent job navigating today's evolving market dynamics. And doing so in a way that is consistent with our long-term operating strategies. We continued this approach in the third quarter, as we remain disciplined in our business practices and focused on delivering an outstanding home-buying experience within a period that underwent meaningful change. To the former in the third quarter, we delivered almost 7 thousand homes, maintained our focus on delivering strong gross margins and overall solid returns, while increasing our backlog and returning nearly $400 million back to our shareholders. As to the latter, consistent with all the reporting and commentary swirling around the current state of the U.S. housing industry, we experienced a notable slowdown in home-buying demand as we moved through the third quarter and interest rates surged higher. The reality that buyer demand slowed through the quarter will not be news to anyone on this call, What I think is interesting, however, is exactly how buyers responded. Based on feedback from our sales associates, in the third quarter, they were routinely working through these important customer issues. Buyers are spending more time getting comfortable with the higher monthly payments interest rates, and financing options before moving forward. The need to sell an existing home remains 1 of the most conversion barriers. Buyers have clear expectations regarding lot characteristics, home functionality, and overall fit. In other words, they are taking advantage of market conditions to be very particular about what they are willing to pay for. And finally, timing often appears to be a symptom rather than the true obstacle. In many conversations, our sense is that not ready yet is really about financing or existing home sale readiness. Rather than timing itself. The most interesting point with these comments, they really have not changed very much from earlier in the year when interest rates initially started moving higher. Prospective buyers continue to have concerns about stretched affordability, high monthly payments, and home sale contingencies. Our sales teams were able to help buyers solve these challenges such that our conversion rates in the third quarter were comparable to the first 2 quarters of 2026. So if the buyer issues have not changed, we are still able to convert prospects at a similar rate, why the meaningful deceleration in reported sales? What changed in the quarter and most notably in September is that the big move higher in interest rates along with inflation, global tensions, and waning confidence reached the point where more consumers simply put their search on pause. In the third quarter, our customer conversion rates were relatively stable, but traffic to our communities was down 14% from the prior year and on a sequential basis down 11% from the second quarter. These conditions have continued through the first few weeks of October. As you would expect, most of the missing traffic were first-time buyers, as this group remains the most impacted by higher interest rates. Not only did this pronounced slowdown among our first time buyers impact our third quarter sign ups, but it also directly impacted our closing volumes for the quarter as the majority of our spec sales are within our first-time buyer communities. We have done a great job controlling starts and, in turn, spec inventory but the impact of having fewer finished spec sales reduced our home closings in the third quarter. I fully appreciate that this is not a very upbeat message for an earnings call. But it is important to acknowledge that the change in the market conditions over the past 30 to 45 days when discussing PulteGroup's results for the quarter and the year to date. Consistent with previous quarters, in the third quarter, we focused on serving what we consider core home-buying demand rather than chasing volume in a market showing little price elasticity. You can see this in PulteGroup's reported Q3 financial results, as closings came in slightly below our guide but a strong reported gross margin of 24.8% helped the company to deliver earnings of $476 million or $2.53 per share. Through the first 9 months of 2026, PulteGroup delivered just shy of 20 thousand homes and generated $11 billion of home sale revenues. Operating within this year's more competitive market conditions, we have appropriately managed price and pace to capture sales while driving year-to-date gross margins and operating margins 24.7%, 14.2% respectively. In alignment with our capital allocation priorities, our strong 9 month financial results supported investment of $4 billion into land acquisition and development, and the return of $1.2 billion to shareholders through share repurchases and dividends. I will provide more detail on how we are navigating current demand dynamics later, but first, let me turn the call over to James L. Ossowski for a detailed review of PulteGroup's third quarter financial performance.

James L. Ossowski: Thank you, Ryan, and good morning. In what was a challenging quarter for US housing, our financial results once again show the value of our more diversified and balanced operating platform. Let's get started. Our net new orders in the third quarter totaled 6.21 thousand homes which is a decrease of 6% from the third quarter of last year. Reflective of Ryan's comments about lower consumer traffic, the decrease in Q3 net new orders was driven by a 13% decrease in absorption pace partially offset by a 7% increase in average community count of 1.08 thousand for the quarter. In the third quarter, our cancellation rate as a percentage of starting backlog was 10% which is down from 12% last year and down 50 basis points from Q2 of this year. Even in today's dynamic demand environment, these relatively stable cancellation rates suggest that customers under contract remain committed to closing on their home. Our absorption pace for the third quarter was 1.9 homes per month, which compares with an absorption pace of 2.2 homes per month last year. Absorption pace was lowest in September, as interest rates surged higher throughout the month. Our lower absorption pace as a consequence of the drop in prospective buyer traffic to PulteGroup communities. By buyer group, net new orders in the third quarter among first-time and move-up buyers were down 9%, and 14%, respectively, from last year. Once again, we benefited from our leadership position serving active adult consumers as Q3 sign ups among those buyers was up 11% over last year. The slower sales among move up buyers reflect in part ongoing weakness within this buyer group in our Texas and West operations. Within our active adult business, we continue to benefit from our prior year land investments as the increase in net new orders was a result of ongoing community count growth. For the past 5 years, we have grown our active adult community count by 20% and we look to increase market share even further with the ongoing rollout of our new Explore by Del Webb brand. PulteGroup's third quarter home sale revenues totaled $3.9 billion which is down 9% from last year's third quarter revenues of $4.2 billion Lower revenues for the quarter were primarily the result of a 9% in closing volumes to 6.88 thousand homes. Q3 closing volumes were negatively impacted by rising interest rates and reduced consumer confidence as we sold fewer of spec homes that we were expecting to sell and close within the period. By buyer group, third quarter closings break down as follows. First-time and move-up were both 38% while active adult accounted for 24% of closings in the period. Closings in the third quarter of 2025 were comprised of 39% first time, 39% move up and 22% active adult. On a year over year basis, third quarter backlog was higher in both units, and value. We ended this year's third quarter with a backlog of 10.3 thousand homes valued at $6.4 billion compared with prior year backlog of 9.89 thousand homes with a value of $6.2 billion At the end of the third quarter, we had 14.6 thousand homes in production, of which 6.63 thousand or 45% were spec homes. Our divisions have done an excellent job managing production as total specs are down 10% from the same period last year, while finished specs are down 16% from last year to 1.7 thousand or an average of 1.6 finished spec homes per community. While our current spec inventory level is right sized, we continue to tightly control our starts pace to align production with changing demand dynamics. In the third quarter, started just over 6.5 thousand homes during a period in which we sold 6.2 thousand houses. Based on backlog, homes under construction, and recent trends in the pace of spec sales, we now expect to close between 7 thousand and 7.5 thousand homes in the fourth quarter. We still have to sell and close a number of spec homes to achieve the guide, so we will be closely assessing buyer demand and taking the appropriate steps needed to convert spec inventory into closings. Further, given the expected Q4 closings, we now anticipate full year closings to be in the range of 27 thousand to 27.5 thousand homes. Based on the mix of homes we anticipate closing in the fourth quarter, we are still guiding our average sales price in closings to be in the range of $550 thousand to $560 thousand in the fourth quarter and for the full year. Based on prior year land investments, we came into 2026 expecting year over year community count growth of 3% to 5% for each quarter, but our average Q3 community count of 1.08 thousand was up 7% over last year. The higher growth rate realized in Q3 reflects the slower closeout of existing communities in the period. We are still forecasting year over year community count growth of 3% to 5% in the fourth quarter, but fewer community closeouts in the period. Could again elevate the percentage growth rate. Consistent with our previous guidance, our reported third quarter gross margin was 24.8%, which is down 140 basis points from last year and down 20 basis points sequentially. From Q2 of this year. Our reported third quarter gross margin is inclusive of incentives of 10.4%, as well as $26 million or 70 basis points of land impairment charges recorded in the period. In the comparable prior year period, incentives were 8.9% we recorded $17 million of land impairments. On a positive note, our national and divisional world procurement teams continued to do an excellent job working with our trades and product suppliers to manage construction costs. Ulti's third quarter build costs were $75 per square foot, is down 5% from last year and flat with the second quarter of 2026. Taking into consideration our backlog, current demand conditions, competitive market dynamics, and the need to cycle through existing spec inventory we expect fourth quarter gross margins to be in the range of 24.0% to 24.5%. Given our Q4 margin guide, we are maintaining our guidance for full year gross margin to be in the range of 24.5% to 25.0%. SG&A expense for the third quarter was $397 million or 10.3% of home sale revenues. In Q3 of last year, SG&A expense was $401 million or 9.4% of home sale revenues. With higher interest rates pressuring consumer demand, and the potential that rates remain elevated for longer, we remain focused on controlling overhead expenses while still delivering superior build quality, and an outstanding home-buying experience. Still, given our updated forecast for fewer closings this year, we now expect full year 2026 SG&A expense to be in the range of 10.3% to 10.5% of home sale revenues. Our financial services operations reported third quarter pretax income of $46 million which is up slightly from last year's pretax income of $44 million Mortgage capture rate in this year's third quarter was 85%, compared with 84% last year. PulteGroup's reported pretax income for the third quarter was $625 million and our tax expense for the period was $149 million or an effective tax rate of 23.9%. Our effective tax rate benefited from energy tax credits recorded in Q3. For the fourth quarter, we expect our tax rate to be approximately 24.5% assuming no discrete period specific tax events. Q3 reported net income was $476 million or $2.53 per share. In the third quarter of 25, we reported net income of $586 million or $2.96 per share. Pulte's Q3 earnings per share was calculated based on 188 million diluted shares which was down 5% from the prior year as we continue to allocate capital to systematically repurchase outstanding shares. In Q3 of this year, we repurchased 2.8 million common shares for $350 million an average price of $124.70 per share. Over the first 9 months of 2026, we repurchased 8.4 million common shares for $1 billion for an average price of $123.51 per share. While market conditions can make underwriting land transactions more difficult, we were successful in investing $1.3 billion in land acquisition and development in the third quarter, of which 51% was for the development of our existing land assets. Year to date, we have invested $4 billion in land acquisitions and development. We now expect to invest approximately $5.3 billion in land for all of 2026. Inclusive of land transactions completed in the period, we ended Q3 with approximately 224 thousand lots under control. Total lots under control are down 16 thousand from the third quarter of last year and down 4 thousand lots sequentially from Q2 of this year. We continue to underwrite new land deals, we are also walking away from select option transactions that may no longer meet risk adjusted return thresholds. In the third quarter, elected to walk away from approximately 8 thousand lots previously held under option. As we have discussed on prior calls, we view lot options as a tool to both improve project returns and to help mitigate market risk. 1 without the other, really provides PulteGroup with limited if any value. Reflecting on our differentiated approach to the land options. At the end of Q3, over 85% of PulteGroup's land options were with underlying land sellers. The rest of our options are structured as 1 off transactions with a select number of land bankers. At the end of the quarter, we had 55% of our lots held under option. Lastly, when it comes to optioning dirt, we continue to solve for the best business outcome on a deal by deal basis rather than simply targeting an option lot percentage. Given our operating results for the first 9 months of 2026, we still expect operating cash flow generation for the full year to be approximately $1 billion and finally, we ended Q3 with $1.4 billion of cash and debt-to-capital ratio of 12.1%. Adjusting for the cash balance, our net debt-to-capital ratio at quarter end was 3%. Now let me turn the call back to Ryan for some final comments.

Ryan R. Marshall: Thanks, Jim. This latest increase in interest rates has forced more consumers to the sidelines and work to make overall operating conditions more challenging. While higher rates made demand conditions in the third quarter generally more competitive throughout the country, our geographic diversity again proved incredibly valuable. In the third quarter, we continue to see outperformance in our Florida operations and key markets in the Midwest. Better performance in these markets helped to offset softer demand in other areas of the country, including markets in the Southeast and ongoing weakness out West. Looking beyond the quarterly earnings, I believe in the fundamental strength of long-term housing demand, and across all the generations and populations the desire for homeownership remains as high as ever, as the financial and emotional underpinnings are too compelling to ignore. I also believe that after months of mortgage rates above 7%, consumers could view even a modest pullback in interest rates as reason enough to reengage in the home buying process. Although I acknowledge that it may take more than just a move lower in interest rates, as consumer confidence is weighed down by rising fuel costs, and fears about ongoing inflation and conflict in The Middle East. While a quick reacceleration in home buying activity is certainly possible, the reality is that higher interest rates pressured industry wide new home sales in September. And the potential for interest rates to stay higher for longer is clearly present. As such, I think it is helpful to discuss how we are assessing market opportunities and challenges. First, our diversified operating platform offers tremendous advantages as we can capitalize on the stronger markets, and consumer groups to help offset any weakness in other parts of the business. Second, consistent with our demonstrated operating practices, we remain focused on serving core demand rather than shedding margins in pursuit of less profitable low-returning volumes. Obviously, we must turn assets. But sometimes lowering price does not generate incremental sales. Rather, it just makes all your home sales less profitable. Third, we have a robust and well structured land pipeline. We are on track to invest $5.3 billion in land acquisition and development this year. If conditions warrant, we are fully prepared to reduce land spend in 2027. Further, given the very intentional way we have structured our controlled lot position, we can and will walk away from option lots that no longer meet return hurdles. And finally, PulteGroup's balance sheet provides tremendous strength and financial flexibility. With $1.4 billion in cash, and net debt-to-capital of only 3%, not only can we weather tough times, but we can capitalize on market opportunities as they develop. Last week, we had our quarterly operations reviews with my senior team along with our 4 area presidents, and the president of Pulte Financial Services. Beyond just reviewing Q3 results, the field leaders already developed action plans and where appropriate, are already taking steps to respond to the changing market dynamics. I cannot underestimate the value of having an experienced leadership team that can quickly assess and adjust. I want to thank them and the entire PulteGroup organization for the operating and financial success they delivered in the third quarter and for their efforts to ensure our company's success going forward. Now let me turn the call over to James Zeumer.

James Zeumer: Great. Thanks, Ryan. We are now prepared to open the call for questions. We can get to as many questions as possible during the remaining time on this call. We ask that you limit yourself to 1 question and 1 follow-up. Erica, we are prepared to start Q&A.

Operator: We will now begin the question and answer session. As a reminder, if you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please standby while we compile the Q&A roster. Your first question comes from the line of Alan Ratner with Zelman. Your line is open. Please go ahead.

Alan Ratner: Hey, guys. Good morning. Thanks for all the detail, and nice job in a tough market. Appreciate the color on the traffic during the quarter. I was hoping to dig in a little bit more on some price point trends that you are seeing recognizing that both move up and active adult, I think, have been relative outperformers for quite a while now. Did you see the same magnitude of traffic pullback at those price points? Or are you seeing maybe differences in behavior between, you know, the move-up and active adult buyers versus entry level right now given the recent rate move?

James L. Ossowski: Yes, Alan. Thanks for the question. Definitely, all buyer groups felt it. But the first-time was outsized impact there. So I do not think you know, any buyer group is totally immune, but the move-up in the active adult certainly fare better, especially, you know, given a lot of those buyers, in our world pay cash. They are less kind of rate sensitive than the first time buyers, which, you know, largely 100% need a 30 year mortgage or some kind of mortgage.

Alan Ratner: Got it. That makes sense. And then on the gross margin guide, obviously, a little bit of pressure sequentially, but not too much. And I am just curious with incentives, flat on closings, can you talk a little bit about what you are doing on orders right now? And ultimately, how high are you willing to take that number if rates do not pull back at all in the next year's spring selling season, or how should we think about just the price versus volume interplay next year?

Ryan R. Marshall: Yeah. Alan, I think, you know, the way I would address that is we really. And we tried to address it in our prepared remarks that we are seeing inelasticity in price right now. And so a lot of incremental discount above and beyond where we are at does not necessarily generate a whole bunch of incremental sales. That creates economic benefit from the incremental sales. We definitely do focus on inventory turn, and it is a critical component of how we operate. So you know, there is there is a point at which you say, we have to kind of lean in more in order to turn inventory. But we are quite a bit above those levels. So with that in mind, you know, we are really looking at if we are going to lean in with more incentives, does it truly generate incremental, sales volume? And if the answer is no, we think the much better economic outcome for our company and our shareholders is to kind of stay in the ballpark that we are right now. We certainly benefited our margins certainly benefited in the most recent quarter because we sold less spec and, generally, that spec-- final spec is where there are higher incentives. So a little bit of a double edged sword in the third quarter, You know, the less spec inventory sales helped margins, but it hurt us on the volume side. You know, as we move into the fourth quarter, we have factored in kind of some of the incremental discounts that we would expect to give on the spec inventory. And that is all baked into the margin guide that we have given for the quarter and the full year.

Alan Ratner: Great. Appreciate all the detail. Thanks a lot.

Operator: Your next question comes from the line of John Lovallo with UBS. Your line is open. Please go ahead.

John Lovallo: Good morning, guys. Thanks for taking my questions as well. The first 1 is, several of or 2 of your competitors had talked about a little bit of incremental pressure from the existing home market as folks were willing to be a little bit more competitive on pricing after waiting 3 or 4 years to sell. Curious if this had an impact on your move up segment in particular. And then maybe conversely, if this did in fact happen, a positive in the sense that it sort of restarts the flywheel on the housing value chain? It could actually result in, you know, a better year as we move forward perhaps?

Ryan R. Marshall: John, I think there is a few anecdotal markets. And with the environment that we have been living in and we continue to live in is that pricing between new and resale is almost on top of 1 another. And in fact, in some cases, resale is more expensive than new. Which is a phenomenon that I do not think we have seen often in the you know, the 25 years that I have been in this business. So, I do not I do not know that I would necessarily 100% agree that we have seen a big unlock in resale pricing going lower I do agree with you that the resale market freeing up does restart the flywheel, and that is been a consistent comment that we have been making for the better part of a year and a half. The thing I would comment on, and Jim-- I touched on it, so did Jim, 1 of the biggest impediments that we are seeing right now is that our move up and active adult buyers need to sell their existing home, and that is tough. And part of the reason it is tough is because the prospective buyer that is going to buy their home is faced with a 7.5% interest rate, and they do not have the ability to tap into the bot down mortgage rate like we can offer. So there is you know, there is definitely some headwinds out there as it relates to resale market and the new home market that is largely centered around 7.5% interest rates, we can certainly address some of that. We are with our bought down rate, but it is, you know, it is hard to, reach over the fence and help address the challenge on the resale side.

John Lovallo: Yep. that is helpful. And I am curious what you guys are experiencing on the stick and brick and labor cost side during the quarter. what is your expectation also as we move into the fourth quarter?

James L. Ossowski: Yeah. We are really pleased with where we are at this is the third quarter in a row that we have, seen our sticks and bricks are down 5% on a year over year basis. So you know, as we look at it, teams are doing a great job and, you know, we would continue to expect that we can you know, bring costs down year over year on low single digits again in the fourth quarter. Okay. Fantastic. Thank you.

Operator: Your next question comes from the line of Stephen Kim with Evercore ISI. Your line is open. Please go ahead.

Stephen Kim: Yeah. Thanks very much, guys. Appreciate all the color. Was wondering if you could talk a little bit about the SG&A. I know that, that was something that last quarter folks were kind of wondering how you were going to hit your guide for the year. I understand that, obviously, slower sales and all that certainly creates leverage issues. But your SG&A quarter actually exceeded us in actual dollars even though the revenues were a little lower. So I just wanted to know, was there anything that was unexpected to you in terms of something that actually caused you to incur greater SG&A dollars than you expected this quarter. And as you look ahead, I am curious if your increased guidance assumes maybe something different than you had thought about maybe the mix of homes, like high end homes, I am thinking out in the West or something like that, which creates deleverage issues for you in the fourth quarter.

James L. Ossowski: Hey, Stephen. Great question. You know, SG&A is something we look at all the time. Really, as we look at kind of the third quarter, you are right. As absorption slows and volume has come down, we have really run into a couple things. 1, some of our communities are hanging around longer than we thought. So of those that are taking longer to close out, we have got costs on that. You nailed it at lower absorption paces, whether you are selling 3 homes a month in a community or 2 homes a month in a community, you still have to staff at the exact same way. So you know, when we factored in the guide, we looked at kinda where it is at. We looked at our volume. That we load for the course of the year, and we really do not have anything you know, noteworthy that we need to change course on. it is just more of a realization of it as communities are hanging around longer and absorption paces have come down. We have lost some leverage in the business.

Stephen Kim: Yeah. If I could ask a follow-up, still staying on the SG&A. Jim, Is it we are seeing that you are performing obviously better on the active adult. But the entry level as well as the move up, maybe it is it is more challenging. I am curious, is there a mix issue as well that we should be thinking about for your SG&A? For instance, does your active adult business carry with it maybe a little bit of a higher SG&A load, partially offset by higher gross margin? Or is there anything like that? I mean, I generally think higher priced homes have less SG&A. As a percent. I mean, in other words, better SG and A leverage. But maybe if you can just speak to how mix can affect SG&A?

James L. Ossowski: Yeah. I would tell you, Steven, we really do not see across our different consumer groups a different mix of SG&A. You are right. If you are at a higher ASP level, you probably get better leverage out of it. But again, when you look at the absorptions, you know, we quoted they were off 13% for the quarter. You know, again, we are still staffing the same level in our in our communities from a construction and sales standpoint. But as you lose that leverage, that is really the headwind that we are fighting against this year.

Ryan R. Marshall: Steven, the only other thing, you know, with our, Del Webb communities, they tend to be bigger. They have bigger sales centers. They have more models but you do a lot more volume out of those communities as well. So to Jim's point, the way we run our businesses and the way the management teams are set up there is really no difference between a Del Webb community and a first-time Centex community in terms of the overhead dollars that are spent in order to run a community.

Stephen Kim: Gotcha. Okay. Thanks very much, guys. Appreciate it.

Operator: Your next question comes from the line of Matthew Bouley with Barclays. Your line is open. Please go ahead.

Matthew Bouley: Good morning, everyone. Thanks for taking the question. So on the gross margin, the Q4 gross margin, you mentioned market conditions and kind of needing to clear out existing spec and sort of the incentives required to do that. I guess, much of that 4Q margin guide is specifically related to those 2 issues, the greater spec mix and the incentives required to clear out that. My question is really, is there an implication that if you are successful in kind of clearing out that spec in Q4, could that headwind actually lessen a little bit into 2027? And obviously, the rest is dependent on market conditions. Just trying to think about what does and does not persist as we get into 2027. Thank you.

Ryan R. Marshall: Yeah. Hey, Matthew. I just, you know, maybe clarify 1 thing. there is not we do not have a spec problem. Our spec inventory is kind of right where we want it to be. And so we actually had less spec closings that came through in the third quarter than we would have expected And so we did get a benefit above the guide. Our Q4 margins you know, we have think, adjusted for the reality that we are in and we have mixed in stuff that is in backlog, stuff that was dirt sales, stuff that sold as spec in process, and then things that we would expect to sell and close during the quarter as a spec home, which typically come with lower gross margins and have higher discounts. Your question about what does that mean for next year, you know, I think it is going to kind of come down to do you have a change in mix dirt to be built and spec, we have been you know, fairly vocal and open to say, we are moving-- kind of transitioning the business back to more dirt sales. And it is-- you know, we have we have said we would hope to get it accomplished by the end of 2027. We were on track to do that. You know, markets got a little bit tougher, but we would still expect to be back to an optimal mix of 60% dirt sale, 40% spec, You know, if all things being equal, that would have a favorable outcome in terms of margin. Just because our highest margins come on, homes that we sell as dirt. If that all kind of holds together, Matthew.

Matthew Bouley: Got it. No. Yeah. No. that is that is really helpful. Thank you for that, Ryan. And secondly, just on production. You know, it looked like you started more homes than you sold in Q3. Was that always the plan or just more of a function of how sort of quickly the market conditions changed? Going forward. How would you think about kind of balancing starts and sales and further reducing inventory from here? Thank you.

Ryan R. Marshall: Yeah. Matthew, it is entirely a function of how quickly the market turned and specifically in September. So, you know, as you. I am sure you can appreciate we submit for permits and August for homes that are going to start in September. So kind of the ball's in motion and rolling on those things. And because there is such a leg down on sign up and sign up activity in September, You know, we are a few hundred units out of balance from kinda perfectly matched starts to sales. Got it. Well, thanks, guys. Good luck.

Operator: Your next question comes from the line of Mike Dahl with RBC Capital Markets. Your line is open. Please go ahead.

Mike Dahl: Morning. Thanks for taking my questions. Ryan, just sticking with the fourth quarter dynamic and the specs. Can you just help us understand within the closings guide, you mentioned you have to sell and close the number of specs to hit that. What is that ratio of specs assumed in the 4Q closings guide that still need to be sold? And how does that compare to the most recent periods?

Ryan R. Marshall: So it is going to be more comparable to what we experienced in the third quarter, Mike? Which was dramatically lower than what we would experienced Q4 of last year, Q1, Q2 of this year. There was a meaningful change when rates went to 7.5 percent. And, you know, as much as anything, I think a meaningful change in how the consumer is feeling and, you know, there is so many things out there that we just have zero control over. Gasoline at 6 plus bucks a gallon, the war, confidence, etcetera. So we have we have factored in our most recent spec conversion experience into our Q4 guide.

Mike Dahl: Okay. Good to hear. And then I know it is not standard practice for you guys, but just given the situation, can you help us understand just. Or maybe quantify a little more what the what the falloff in September was, so maybe order patterns? Or trends on a year on year basis by month, and then you mentioned October started off the same. So October as well. And I know it is heat at the moment. Here, but and we do not wanna. We wanna be careful about how much to extrapolate after rates have kinda gone up in a straight line. But this is kinda annual planning time for you-- yourselves and a lot of other builders. So just any early thoughts on how this influences your planning for 2027 production?

Ryan R. Marshall: Yeah. Hey, Mike. We are we are probably not gonna break with trend on the month by month. Kind of commentary other than just to say that there was a noticeable change in September and it is continued into, October. We are in the middle of planning time right now. And it is. You know, the current environment has made it a more difficult planning time. It was part of the reason that in my prepared remarks, toward the end, I tried to kind of highlight how we are seeing opportunities and challenges and where we think there are some potential opportunities, and there are some. And then there is plenty of challenges out there as well. You know, the biggest thing that we are spending the most time talking about is how we are gonna think about capital allocation. You know, we have a great business. We are in the right geographies. We love the consumers that we are serving. There are so many. And we have an amazing balance sheet. There are so many good things about our business, our strategy, how we are operating Those are the things that we can control when we are saying grace over. And where we can really kind of position ourselves for continued success is to be thoughtful and smart about land spend and capital allocation. You know, I think we have been super clear. We are running this business for the long term. Not for this quarter or even next quarter. So, you know, that is that is how we are spending most of the time thinking about our planning process is really all around capital allocation. Okay. Thanks, Ryan.

Operator: The next question comes from the line of Sam Reid with Wells Fargo. Your line is open. Please go ahead.

Sam Reid: Thanks, everyone. Wanted to touch on incentive loads a little bit in third quarter. It looks like they were sort of flattish sequentially versus Q2. But can we perhaps isolate any changes in the composition of those incentive loads by buyer cohort Mike, I just wanna better understand what their sequential step up in incentive loads on spec. And, conversely, you know, or any changes to incentive loads across move up. And then you have mentioned in the past that you have been doing more build to order closings with rate buy downs slash forward commitments. Any sense of the attach rate there?

James L. Ossowski: Sure. I would tell you during the quarter, the 10.4%, which was flat sequentially with Q2, We really did not see any kind of a change in that dynamic amongst the consumer groups or even within the mixture of it. You know, it is split between financing incentives as well as discounts on for example, spec homes that we have. On the build order, we are really happy with how we have been able to use the financing incentives on that today. About 40% of you know, the financing incentives and forward commitments we do are for build to order homes. So as Ryan's touched on before, those are higher margin homes. And so we like the opportunity to use those as we start to kinda build our backlog for Q4 and, you know, now it is still even going into 2027.

Sam Reid: that is helpful. And then let's maybe switch gears and talk SG&A for a second. I wanted to drill down a little bit there. Just talk through how much of the SG and A, you know, perhaps relative to expectations, above expectations, I should say, was a function of higher third party broker commissions. We have heard anecdotally from some of our contacts that they have been stepping up across many markets. So curious, you know, whether you are embedding call it, higher broker attach rate and or higher broker commission into your fourth quarter, implied SG and A guide as well. Thanks.

Ryan R. Marshall: Yes. Sam, I would tell you there is there is not much in our SG&A that is different as a result of broker rate or attachment. The attachment rate has been running higher for probably the better part of 18 months because of lack of resale activity. So the brokers that are out there with buyers you know, the good news is more of them are coming into our sales centers, which means our attachment rate ticks up slightly, but that is about it. You know, we do in certain cases, offer broker incentives, but we really try to manage that. I would rather see if, you know, there is incentives that need to be given. We would rather see those go to the buyer.

Sam Reid: that is helpful, guys. Appreciate.

Operator: Your next question comes from the line of Michael Rehaut. With Melius. Your line is open. Please go ahead.

Michael Rehaut: Thanks. Good morning, everyone. Wanted to first focus on morning. Wanted to first focus on supply if we can just dial into that a little bit more and specifically thinking about the secondary market and if there are any markets that kind of stand out to you as being more challenging from a supply standpoint, you know, last month, a competitor highlighted Florida and Texas. And I am just curious if you are seeing any markets that really stand out on that level in terms of the existing, you know, for sale market that maybe have added a little bit of pressure to the broader landscape?

Ryan R. Marshall: Hey, Mike. We would highlight Texas Those. It really all 4 markets, I think, have seen an uptick in available inventory, and it is you know, all those. The entire state has been more difficult for some time. You know, we have seen flashes of brilliance in Dallas in Houston, but you know, Texas continues to be a tougher operating environment. Florida, where we are positioned the consumers that we are serving, we are not we are not seeing inventory pressure in Florida.

Michael Rehaut: Okay. Great. No. Thanks for that. And maybe just shifting gears a little bit, to the balance sheet and the M&A landscape, you know, history maker being acquired this past quarter. You know, a pretty good sized, regional player in Texas. Just wanted your thoughts in terms of know, in this type of backdrop, I am sure there are I would assume, some, you know, decent sized regional players that are perhaps seeing some levels of stress in the current market backdrop? You have a fantastic balance sheet. And just wanted to know if you are you know, from your perspective, if you are seeing maybe an increase in opportunities or perhaps sellers are taking a step back because they do not wanna sell it in this type of market. Any thoughts around kind of the opportunity set if it is changed and how you are thinking about you know, your approach to the market relative to past years?

Ryan R. Marshall: Mike, we do have a phenomenal balance sheet, and, you know, it is it is 1 of the things that I think is arguably our. Will probably prove to be 1 of our biggest advantages in a more difficult operating environment. In terms of our approach to kind of M&A, etcetera, part of the reason we have such a great balance sheet is because we avoided chasing kind of unnecessary or inappropriate opportunities. And, we will we will stick to that kinda game plan. We do look at a lot of things. And we are just. We are very choosy and as. And I will not spend a ton of time going through it today. We look at M&A opportunities as really more allocation of capital into land. And so we think hard about the consumer groups, that an m and a opportunity will bring to us. We think hard about the markets that it will give us access to. And if. As we go through evaluation process, we do not think that it helps us in terms of our long term strategy. We are not interested in acquiring a competitor just for the sake of saying we got bigger. Because that is that is not where we think value is created. So we certainly got this. The financial strength and financial capability to execute. But we are gonna be super disciplined that if we are pursuing an opportunity, it truly furthers, you know, further and gives us gains against our strategic priorities. Great. Thank you.

Operator: Your next question comes from the line of Anthony Pettinari with Citi. Your line is open. Please go ahead.

Anthony Pettinari: Good morning. I was wondering how cycle times trended in 3Q and if there is any scope for improvement there. And just more generally, as you think about levers you can pull to protect margins and returns in a softer market, Is there anything worth mentioning in terms of home format or home size or anything else, you know, we should keep in mind.

Ryan R. Marshall: Hey, Anthony. Thanks for the question. And our procurement teams just did a phenomenal job. We have maintained kind of our price per price per foot in the current environment. And I think we have done just a wonderful job with that. There is pressure out there on a couple of fronts, and to your cycle time we went below 100 days for the first time since pre COVID. And that includes all of the big 4 and 5 story multifamily buildings that we do or incorporated in that 99 days. So I think I think our construction teams have done an amazing job managing production. Our procurement teams have got. Done a great job with cost. The headwinds that are out there, the current immigration enforcement, which I think has been widely reported on, that is having disruption in the broad labor market. And so, you know, we are we are certainly navigating some cycle time pressures as a result of kinda what is happening more broadly. With the with the labor pool. And then, in terms of, you know, are there cost opportunities, we are always looking for them. But in an inflationary environment, which we seem to clearly be back in, you know, I think it will it will get harder and harder. Especially with kind of fuel where it is and you know, nothing gets to our job sites without coming on a truck. You know, those cost pressures, think, are real.

Anthony Pettinari: Okay. That. that is very helpful. And then you spoke to weakness in Texas. I think earlier, you also mentioned the West. Are you seeing anything specific to those markets around local economies or price points or mix or how white collar workers are doing? Anything that you would call out the Western Region?

Ryan R. Marshall: Yeah. The West the West has been tough for a long time. We are probably on 2, 2.5 years of challenges in the West, and you know, they are they are really good communities. They are nice places to live. They are thriving economies. I do not think there is anything that is broken. The biggest thing that I would call out is just affordability. it is it is really expensive in a lot of the Western markets that we operate in, particularly the coastal markets. So you know, they will. They are they are good places where jobs are being created and people wanna live there. We are pretty confident that you know, this too will turn, and they will come back into being kinda favorable places to do business. But we are in, you know, we are in a little of a barrel right now in the West. Okay. that is helpful. I will turn it over.

Operator: Your next question comes from the line of Ralph Jadrasich with Bank of America. Your line is open. Please go ahead.

Rafe Jadrosich: Hi. Good morning. it is Rafe Jadrosich. Thanks for taking my question. First, on the Stick and Brick side, think you commented on the year over year trend that you are still expecting down single digit in the fourth quarter. How do we think about it sequentially? Is that flattening out? Are you starting to see any inflation there?

James L. Ossowski: Yeah. Really, the only thing that I would say in the fourth quarter, and we had called it out earlier in the year, was you know, lumber started to move up earlier in the year, which we said would be a little bit of a headwind in the fourth quarter. Lumber has started to stabilize though, but really that is that is it. Otherwise, I would tell you the teams continue to do a good job, and I would tell you Q4 should know, look pretty similar to where Q3 is. Thank you. that is helpful.

Rafe Jadrosich: And then if sort of the housing macro backdrop stays similar here kinda into 2027, like, would you expect raw land prices to start to come down? You talked about walking away for some lots. Mike, how do you think about the land price environment from here?

Ryan R. Marshall: Yeah, Rafe Jadrosich. It. I think it really depends on where the land is located. From a city MSA standpoint, but also the specific city block that land is located in. So there is some land that it continues to accelerate in price, it is super competitive. And, you know, there is there is there is no decreases there. Some of your b and c locations, we are certainly seeing kind of pricing there change. You know, we are we are. We all. Just as a matter of practice, good market, bad market, we always re underwrite land kinda multiple times as we go through kind of the entitlement process before we ultimately buy it. So you know, probably the biggest benefit that we have seen is the acceleration of land prices. The rate of acceleration has slowed. Significantly But I do not I do not know that we are quite into a place where I can tell you that land has gone on 30% off, end-of-season clearance we are probably not quite there yet. Thank you. that is helpful.

Operator: We will take our final question from Susan Maklari from Goldman Sachs. Your line is open. Please go ahead.

Susan Maklari: Thank you. Good morning, everyone. Thanks for taking the question. I wanted to talk a bit about at the higher end, once people do start to transact, are you seeing any change in the upgrades or the features that they are opting to put in the homes? Are they still spending at the same level once they do decide to make that decision?

Ryan R. Marshall: Sue, they are. You know, it is a buyer that is you know, assuming they are making the decision to move forward. They are they are better prepared. They have got equity from a prior sale. Their personal balance sheets are stronger. And we are seeing little change in terms of how they are behaving relative to kind of prior quarters.

James L. Ossowski: Yeah. I mean, for reference, Susan, in the in the quarter, and lot premiums were $117 thousand per lot. that is up from last year and from the prior quarter. Little bit of that is mixed because we had less spec sales, but to Ryan's point, if people are committed to coming in and closing on the home, taking the opportunity to fix things that they want.

Susan Maklari: Okay. that is helpful. And then maybe just building on that, are you seeing that there is more cash sales that are coming through as well? In this market?

Ryan R. Marshall: No. I think our mix of cash buyers by brand is pretty consistent with what we have historically seen. So as a percentage, because we had less first-time, you know, maybe it ticked up a little bit overall, but you know, the way we do, and I think you should look at it, is by buyer type, and it is unchanged. Yes.

Susan Maklari: Okay. Alright. Thank you. Good luck with the quarter.

Ryan R. Marshall: Thank you.

Operator: We have reached the end of the Q&A session. I will now turn the call back to Jim Zumar for closing remarks.

James Zeumer: Appreciate everybody's time this morning. We are certainly available if you have questions over the course of the day. Otherwise, we will look forward to talking to you in a quarter. Thanks, everybody.

Operator: This concludes today's call. Thank you for attending. You may now disconnect.